BP's Strategic Initiatives To Counter Macro Risks Impress

On Jul 8, 2016, we issued an updated research report on energy giant, BP plc (LON:BP) (NYSE:BP) .

The company is offloading its non-core upstream properties and creating a portfolio with potentially stronger growth from a smaller base. BP has already sold refineries in Carson, CA and Texas City, TX, which hold half of its U.S. capacity. It has, however, retained three refineries – Cherry Point, Toledo (co-owned with Husky Energy), and Whiting – with the greatest competitive advantage. These refineries are expected to improve returns for the company.

In terms of assets, BP owns a strong and diversified portfolio of global energy businesses that offer attractive long-term growth opportunities. The group’s strong inventory of development projects should support volume growth in the long run.

BP’s upstream margins are likely to be driven by its four main profit centers – Angola, Azerbaijan, the North Sea and the Gulf of Mexico. Over the medium term, the company expects strong cash flows from project startups that will enhance shareholder distributions.

BP has been able to counter the challenging macro environment and improve its economics on the back of certain strategic initiatives. These include cost reduction, the exercise of capital discipline, efficiency gains and consistent execution.

However, BP announced divestitures of several non-core assets that comprise interests in many North Sea oil and gas fields and in its Yacheng gas field in the South China Sea. For 2016, the company is targeting to offload assets worth $3–$5 billion. The huge asset sale forecasts raise concerns with respect to production performance in the coming years.

Also, BP projects a weaker refining environment for the long term. This is mainly due to narrowing crude differentials.

Moreover, BP’s reliance on Russia and offshore activity worldwide increases uncertainty owing to sanctions and low oil prices. As Russia is the second-largest contributor to BP’s production and earnings after the U.S., Russian sanctions would adversely affect the company’s operations and also the dividend income from its stake in Rosneft.

Zacks Rank and Stocks to Consider

BP holds a Zacks Rank #2 (Buy). Other well-ranked players from the energy sector are Braskem S.A. (NYSE:BAK) , FutureFuel Corp. (NYSE:FF) and ReneSola Ltd. (NYSE:SOL) . Each of these stocks sports a Zacks Rank #1 (Strong Buy).